This deal had losers, not victims
Kansas City Star
16 July 2003
Jerry Heaster

Let's hear it for federal Judge Milton Pollack, who recently struck a blow in support of responsible adult behavior among consenting stock market buyers and sellers.

Pollack did his part to protect the integrity of financial markets by throwing out a class-action lawsuit brought by investors claiming to have lost money because they were misled by Wall Street sharpies.

The plaintiffs were investors in a tech stock mutual fund managed by Merrill Lynch. The investors charged that they had been done in by tainted stock research instead of their own bad judgment or greedy impulses.

Judge Pollack was having none of it. He rejected their self-proclaimed "victim" status and said they should have been aware of the unjustifiable risks involved. He called them "high-risk speculators (hoping) to twist the federal securities laws into a scheme of cost-free speculators insurance."

That sort of brutally honest candor in the service of individual responsibility is almost impossible to find in American society these days. But Pollack isn't your garden-variety jurist. He's 96, fiercely independent, and as a young securities law practitioner in the '30s was seen by many as a champion of investors.

A key to the judge's ruling was that conflicts of interest in the investment banking milieu have been the subject of continuing media analysis and exploration. Even when there are accommodative relationships between investment bankers and stock research analysts, the opinions of those who tout stocks don't come with a warranty, as The Wall Street Journal put it.

The most telling aspect of the ruling was Judge Pollack's laserlike focus on whom the adversaries should actually be in the case. Merrill Lynch may have created trading vehicles and opportunities, but the lost money that plaintiffs were seeking to recover went to those on the other side of the trades.

"Those few lucky winners, who are not before the court," he pointed out, "now hold the monies that the unlucky plaintiffs have lost -- fair and square -- and they will never return those monies to the plaintiffs."

The judge's wisdom is becoming even more obvious now that a frothy stock market recovery is showing signs of bubble-izing all over again. As The Wall Street Journal recently noted, the rapidly expanding volume of money chasing high-risk speculative stock issues is reminiscent of several years ago.

Research shows stocks in money-losing companies have been doing better since last October's market turn than those of profitable companies. Thus, even the loss of trillions of dollars in value since 2000 apparently wasn't enough to teach some the lesson they needed most to learn.

As Judge Pollack well knows, there is only one antidote for speculative excess in financial markets: the cleansing process of horrific, unforgettable losses. This process can't function in an environment of moral hazard that encourages reckless speculators to believe losses will be salvaged by smart lawyers, sympathetic courts and politically ambitious prosecutors.

Without no-nonsense arbiters such as Judge Pollack, the capital formation system so critical to economic growth and prosperity would soon be rendered unable to direct financial resources to their most productive uses.